Global Economics

Japan Gets a New Government

The Democratic Party of Japan has taken control of Japan's Lower House with an historic election victory

After 54 years of almost unbroken rule, Japan's Liberal Democratic Party government has been expelled from office. At 10:21 p.m. local time, national broadcaster NHK announced that the opposition Democratic Party of Japan had won a decisive 241 Lower House seats. When votes for all 480 seats are counted, NHK projects that the DPJ alone will go on to win more than 300 seats, marking a huge swing against the LDP. "We have to make this a victory for the people. We have to respond to the needs of the people," DPJ chief Yukio Hatoyama, who will become Japan's new Prime Minister, said in a televised interview.

Incumbent Prime Minister Taro Aso had conceded defeat a few minutes earlier. "The result of this election is very severe. We have to accept the result and think clearly [about where we go] from here," he said. "People showed their disappointment with the LDP." After ruling Japan uninterrupted, except for a 10-month hiatus in the 1990s, the LDP is expected to be left with just 100 representatives in the Lower House.

Aso, at least, won his seat. Other party bigwigs, including former Prime Minister Toshiki Kaifu and current and former Finance Ministers Kaoru Yosano and Shoichi Nakagawa—best known outside Japan for a slurring appearance at a G8 meeting earlier this year—are among the senior LDP casualties.

The victory for the DPJ, a party formed only 11 years ago, confirmed the LDP's worst fears. Last week former Prime Minister Junichiro Koizumi, who didn't stand for reelection, seemed to accept that defeat for the DPJ was inevitable. "Unless something big happens, it's possible that we'll see a change in government," he said. And on Aug. 25, Finance Minister Yosano, perhaps sensing his impending defeat, added another despondent voice. "The Democratic Party of Japan is engulfing Tokyo like a massive wave," he said at a press conference in Tokyo.

a deep recession and much-needed reforms

Yet while the DPJ's landslide victory is as impressive as the LDP's campaign was insipid, the important question of whether a new government can carry out much-needed reforms and pull Japan's economy out of a deep recession is far harder to answer.

Disappointing economic data released on Aug. 28 show the weight of the challenge for a DPJ-led administration. The Internal Affairs Ministry reported that unemployment reached a postwar record of 5.7% in July, breaking the previous record of 5.5% recorded in April 2003. Just as worrisome, the Ministry said the core consumer price index fell 2.2% in July, the fifth month in a row and the biggest fall in prices since it began compiling the index in 1971. Adding to the gloom, the Ministry noted that household spending was down 2% year-on-year. This year, Japan's GDP is expected to plunge 6%.

Still, there are some reasons to be upbeat. For one thing, today's decisive victory gives the new DPJ government a far stronger mandate than had been previously expected. In addition to a huge Lower House majority, the party already controls the Upper House. In practice, the DPJ should be able to enact legislation with relative ease. "The real problem post-Koizumi has been policy stalemate. Parliament was gridlocked, and nothing got done," says Jesper Koll, president and CEO of Tantallon Research Japan. "[Today's result] tells you people are ready for big change."

Of course, recent elections in other countries show that when the economy is bad, honeymoon periods can be short-lived. In the U.S., the popularity of President Obama's Administration has waned amid rising unemployment and controversy over health-care reform. In India the stock market rallied after the Congress Party's big election victory in May, but optimism subsequently dimmed.

an economic upswing is expected

The DPJ's timing may be better. First, while the July unemployment, deflation, and household spending numbers are grim, economists expect Japan's economy to improve in the months ahead. Hiromichi Shirakawa, an economist at Credit Suisse (CS) in Tokyo, expects unemployment to stabilize around the current level as the ratio of job offers to job-seekers gradually improves. "Given the rebound in industrial production, we believe the pace of contraction [in the job market] will slow and then begin to turn positive," he wrote to clients in a research note.

The DPJ can also benefit from an improving global economy and the impact of Japan's $269 billion economic stimulus package, formulated by the LDP in response to the global financial crisis. Indeed, while it was too late to save the LDP, Japan's GDP increased an annualized 3.7% in the April-June quarter after falling at a double-digit pace in the two previous quarters.

Even so, easing Japan's malaise, which dates back to the collapse of the bubble economy in the early 1990s, may take more than a change of government and being in the right place at the right time. The DPJ must perform in office. That's by no means a certainty given that the party, understandably, lacks experience.

Another problem is how it will fund its consumer-friendly policy pledges, which include postponing a hike in the 5% consumption tax, raising the minimum wage by nearly 40%, cutting the gasoline tax, and eliminating pricey highway tolls. "We will help households with their finances and revive the economy through stronger domestic demand," Hatoyama told reporters on Aug. 1. Yet the party will take the reins at a time when Japan's gross government debt is already the highest in the world and, according to some forecasts, set to reach 200% of GDP.

"the numbers don't add up"

The DPJ appealed to voters with promises to fund its plans by finding savings in Japan's giant bureaucracy. That's popular with many voters, but it's a familiar—and often ultimately unsuccessful—tactic of opposition parties seeking power. "When you look at their economic plans, you're worried," says Richard Jerram, an economist at Macquarie Securities in Tokyo. "The numbers don't add up."

Naohiro Yashiro, a professor of economics and business at International Christian University in Tokyo, is concerned that a DPJ government will be too pro-regulation. For instance, he worries that it will pass legislation making it harder for companies to use part-time workers. "If such a plan were realized, Japanese corporations would go abroad, and no foreign companies would come to Japan," he says.

Indeed, the DPJ so far has offered few concessions to business. The DPJ plans t o lower taxes for small and midsize companies, reform fisheries and farming, and aggressively promote renewable-energy technologies. But without more coherent policies for business, critics say, investment—and the economy—may suffer. "The DPJ has no real strategy for the corporate sector," says Takuji Aida, an economist at brokerage UBS (UBS). Now, with the DPJ's election victory secured, all eyes in Japan will be on the party's next steps.